Monthly Archives: April 2009

It is hard to disagree with Martin’s view that the tax system should be made more efficient. It is also hard to summon up much optimism on this point.

Not only do we not have a carbon tax in the UK, but VAT on domestic heating is lower than VAT on most other goods and services: the tax system encourages leaky, over-heated houses with inefficient
boilers.

The latest UK budget introduced yet more complexity. The eye-catching 50 per cent tax band was not enough; allowances had to be withdrawn, tax relief for pensions complicated beyond understanding, a
two-tier ISA system introduced that discriminates between the over-fifties and the under-fifties (but never fear! That system will last for only six months).

To hope for a super-streamlined tax is naive, but even modest simplifications now seem more remote than ever. The institution of Budget Day [in the UK] does not help: if it had been explicitly designed to encourage showboating, sleight of hand, uncertainty and short-termism I do not see how the job could have been done better.

Team titles might be what matter to them most, but football fans are also generally pleased if a player in their team wins an award. Publishers rarely object when their authors win Booker or Nobel prizes for literature. So how should shareholders in a company feel when the company’s chief executive wins an accolade such as “Best Manager” from Business Week or “Best Performing CEO” from Forbes? New research from two California-based economists suggests that the correct response would be to feel sick.

Economists have long been intrigued by the prospect that chief executives might use their position to pursue wealth, status and perks to the detriment of shareholders. Shareholders, widely dispersed and sometimes protected by flimsy governance, often have little sway over what managers get up to.

This view has unsavoury implications, such as the idea that corporate social responsibility and philanthropy might in fact mean shareholders paying for their chief executive’s golden halo. It has also been prescient: it was in studying economics that I first discovered that managers might be willing to overpay for merger targets because mergers brought them wealth and status, or that they would arrange to receive some of their pay in the form of a large pension because deferred compensation often only causes outrage once it is too late to do anything about it. If only Sir Fred Goodwin’s board at Royal Bank of Scotland had encountered the same lessons.

I am a third-year university student and I share a flat with a student on the same course as me from the year below. We are good friends, but I, alas, want us to be more than that. The risks of my confessing my feelings are quite high. If it works out, I have a girlfriend; if it doesn’t, I’ll end up homeless, looking for an (almost prohibitively expensive one-person) apartment, having lost my best friend. If I keep her in the dark I’m guaranteed to have a roof over my head for the two remaining years. Can economics provide an answer to my dilemma?
Unnamed student, London

Dear student,

The cost-benefit analysis here is deceptive, so let me walk you through it. Your mistake has been to frame your dilemma as a static choice problem: either you confess now and take your chances, or you never confess.

That is wrong. There is, dare I say it, a third way. Simply wait and see whether anything is clearer tomorrow, or the next day, or the day after that.

In technical terms, you have an option on making a pass at this lucky lady, and you will continue to have that option until either you actually do so, or until either you or she falls for someone else. The option is valuable and should not be exercised lightly, and thus expended. Option valuation models suggest that you should make your move only if you are absolutely sure (you clearly are not) or if other suitors are circling and your option is about to vanish anyway.

Even in the latter circumstance, you shouldn’t make your move if you feel the odds are against you. I suspect they are. The chances are that this young woman knows exactly how you feel. Since she has done nothing to encourage you, I expect she is praying you’ll keep your feelings to yourself.

For years, we were told that Wall Street attracted the very best. That was why American investment banks were the envy of the world; that was why stratospheric salaries and bonuses were essential. Other financial centers, such as London, fought tooth and nail to attract the same elite. They were worth it, we were told: If you pay peanuts, you get monkeys.
That argument seems hollow now, but it was always a misunderstanding of the way financial markets work–indeed, the way the whole growth miracle of capitalism works. It’s not that financial markets themselves are a sham: There are indeed very smart investment bankers in the world, and some of them help to make us all richer by providing a bridge between those who could use money and those who have money. It’s just that this is not the whole story.
The fact of the matter is: The market system does not work because of the incredibly smart people in charge. (The Soviets had some pretty smart people.) The market system works because nobody is in charge.
Even when markets surround us, we prefer to forget this. It is easier to focus on personalities, so the financial press like to talk about the leadership of great CEOs. When things go wrong, we search for fools and frauds: a Dick Fuld or worse, a Bernie Madoff. We think that the elite betrayed us or that the elite wasn’t as smart as everyone thought. Politicians–temperamentally inclined to believe in the “great man” theory of everything–tend to agree…

A review of Parentonomics: An Economist Dad Looks at Parenting, By Joshua Gans

What happens when Mr Spock meets Dr Spock? The answer is Parentonomics, an autobiographical account of how an economist used his professional training in game theory to bring up his three children.

Joshua Gans describes his experiences in the labour wards, changing nappies and dealing with tantrums, spousal absences and sibling rivalry – all the while explaining what he did or did not do, the economic principles involved, and whether any of it worked as a parenting strategy.

The obvious question is whether this is supposed to be good advice or some kind of joke… (Continued)